Dividend is a part of profit or earning that companies distribute among its shareholders. Interim Dividend, Final Dividend and Special Dividend are the types of Dividend. Important to note that, distributing Dividend is not mandatory.

Companies with good Corporate Governance, generally, have a Dividend policy in place, where they decide to distribute a certain part of the profit as Dividend every year, either in percentage of the profit or a certain fixed amount.

Distributing 60% of the profit every year (generally called as ‘Dividend Pay-out Ratio’) is a kind of Dividend Policy; distributing Rs.2 per share every year is also a kind of Dividend Policy.

FORMULA AND CALCULATION OF DIVIDEND PAY-OUT RATIO:

Dividend payout ratio is a ratio of Dividend distributed against Earnings

i.e. Dividend Per Share/ Earning per share

If a Company earns Rs.4 per share as profit and gives Rs.2 as Dividend, its Dividend Pay-Out Ratio is 50%

FORMULA AND CALCULATION OF DIVIDEND RATE:

Dividend Rate = Dividend Amount per Share/ Face Value  

Suppose, a Company declares Rs.2 per share as dividend against the face value of Rs.10

Calculating from the above formula its Dividend Rate is 20%

FORMULA AND CALCULATION OF DIVIDEND YIELD:

As an investor this one is more important to look than others.

Dividend Yield = Dividend Amount per Share/ Current Market Price

Extending the above example of Company giving Rs.2 as Dividend and if the Current Market Price is Rs.100

Calculating from the above formula Dividend Yield is 2%

If your buying price is different, you need to adjust it accordingly. If you bought the Shares at Rs.80, your Dividend Yield is 2.5% and if you bought at Rs.120, your Dividend Yield is 1.67%

WHAT IS A GOOD DIVIDEND YIELD? IS HIGHER YIELD IS ALWAYS GOOD?

As there is no Ideal P/E Ratio, there is also no Ideal or Standard Dividend Yield. Any Company with Free Cash-Flow and less capital requirement would distribute more Dividend than others, such as Information Technology Companies and FMCG Companies, whereas Companies with High Capital requirement would distribute a little to no Dividend, such as Banks.

According to some of the economists, Dividend should be the last resort; when Company is done with all expansion and capital investment, then only it should distribute Dividend.

However, I am of the opinion that it is like Blood Pressure, you must have it, but best at certain level, 2-3% only, above that, it is hard to get capital appreciation on our investment. The copybook example of the high dividend and no capital appreciation is Government Banks and PSU Stocks. They are distributing high dividends even if they are in capital intensive business.

The Companies with higher Dividend Yield looks attractive, however it is may be because their stock price is lower. Investors should be looking for established Companies with higher growth prospectus in earning and a little Dividend.  

Click here to read: What is Price-to-Earnings Ratio? Is it really important?

WHAT IS COUPON RATE?

Coupon Rate is the Rate of Interest Companies pay to its Bond or Debenture holders; which is most of the time higher than the Fixed Deposit Rates, as Bonds are riskier. High Risk; High Reward. Coupon rate is always pre-determined against the Face Value. Say, a company issues Rs.1000 Face Value Debenture at Coupon Rate is 8%. So now, Company needs to pay Rs.80 every year to its Bond holders until bonds are redeemed.

WHAT IS BOND YIELD?

Bond Yield is the Interest you earn from the amount you invest; calculated just as Dividend Yield.

Bond Yield = Interest Earned/ Market Price

In the above example, if you subscribed the Bonds and get it at the Face Value, your Bond Yield is 8%

In most of the cases Coupon Rate and Bond Yield both are same, but if you buy bonds at higher or lower price, your yield changes; however, Coupon Rate remains the same.

Another example where coupon rate and bond yield varies is Deep Discount Bonds. Deep Discount Bonds are issued at severe discount against the Face value and redeemed at Face Value. As there is no interest paid, there is no coupon rate, however Investors earn from value gap between Issue price and Redemption Price, bond yield can be calculated from there. Several CAGR Calculators are available online for that.